House price falls could be stabilising

2 October 2008

House prices experienced their biggest annual drop in 17 years in September, according to the Nationwide, but evidence suggests falls could be stabilising.

This is the 11th consecutive monthly fall in house prices, with values now some 12.4% lower than this time last year. The average house is currently worth £161,797, down £24,247 from the October 2007 peak of £186,044.

Falling house prices are a direct result of lower levels of lending by banks and building societies, which have been hit by the US credit crunch and resultant global banking crisis. A lack of consumer confidence has also depleted the number of property transactions, causing prices to plummet.

“The higher cost and lower availability of finance resulting from the ongoing credit crunch are clearly important factors in triggering the slowdown and bringing us to where we are now,” says Fionnuala Earley, chief economist at Nationwide. “Current unrest threatens to increase funding costs further.”

On a positive note, however, Earley believes that the rate of house price falls is stabilising.

"The monthly rate of fall has been almost unchanged in the last three months. This may suggest the beginning of some stabilisation in the pace of house price falls," she explains.

Not everyone has such an optimistic outlook. Seema Shah, a property economist at Capital Economics, warns that house price falls are set to intensify. “The toxic combination of the mortgage credit squeeze, sharply slowing economic activity, and plummeting buyer confidence have all caused house prices to fall at a record pace over the past year,” Shah says.

“With none of these factors likely to disappear, or even ease, over the coming months, the house price declines could easily intensify.”

Howard Archer, chief UK and European economist at Global Insight, agrees that house prices will continue to fall throughout 2008 and 2009.

“Fewer mortgages are available, while lenders have raised their fixed-rate mortgages in recent days,” he adds. “Meanwhile, faster rising unemployment, heightened concerns over the economic outlook and widespread expectations that house prices will continue to fall markedly for some considerable time to come, will depress housing market activity and prices.”

Archer predicts that even if the Bank of England starts to cut interest rates, UK house prices will fall by 15% next year. This would take the price of the average house to just £130,005 by 2010.

Banking crisis

The start of October has been marred by more banking crises, following the US Congress rejecting plans to bailout American banks to the tune of $700 billion. The plan, which would have seen the government buy "bad debt" off the banks using taxpayers' money, was rejected by Congress on Monday 29 September.

The vote prompted panic across global stockmarkets.

However, the US Senate has now approved a new version of the rescue plan, which includes tax breaks for families and businesses. The plan will now go before Congress on Monday 6 October.

It is that the approved scheme will not only benefit the US, but also the global economy - including the British housing market. Fears about bad debt are the key cause to the current banking crisis, as institutions are scared to lend money to each other.

Ahead of the plan being approved, the Bank of England’s latest credit conditions survey shows banks expect to tighten up on lending to households further after credit conditions worsened in the third quarter of this year. This is because the number of people missing their mortgage and unsecured loan payments has risen over the past three months - and lenders expect the numbers to keep increasing.

Paul Dales, UK economist at Global Insight, says that because the survey was carried out before the dramatic events of the past two weeks, credit conditions will probably tighten by even more than expected.

“Even if the problems in the financial markets were miraculously solved overnight, which is unlikely, the impact of the credit crisis on the real economy will be with us for some time.”

Along with falling house prices and deepening global financial crisis, the gloomy survey is likely to strengthen the case for a cut in interest rates when the Bank of England’s Monetary Policy Committee meets next week.

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